India’s Energy Security- Key Issues and Opportunities

Posted in Finance Articles, Total Reads: 3711
, Published on 13 October 2014

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India’s current energy scenario

India’s precarious position with respect to its energy situation is succinctly summed up by Goldman Sachs in their May 29, 2014 report “India Rising – Energy: Reforms, better demand, operating leverage” – India has a fifth of the world’s population but only a 30th of its energy. Consequently, India is the fourth largest energy consumer in the world, much of which is imported.

Image Courtesy: freedigitalphotos.net, Stuart Miles

In FY14, India’s net energy imports were at 6.3 per cent of GDP with an energy import bill of USD 120 billion. In FY’23 it could jump up to USD 230 billion. The 189.24 million tonnes of total crude oil imports in 2013-14 accounted for two-thirds of its crude oil requirements. It is no surprise then that India’s current account deficit of 2-2.5 percent is primarily owing to its energy imports.

India’s dependence on coal, oil and natural gas accounts for 52.9%, 29.6% and 10.6%, respectively, of the primary energy consumption. Its disproportionately high dependence on coal necessitates import of highly priced coal due to the coal industry being mired in various regulatory, technical and distribution challenges.

India’s oil reserves that lie mostly in offshore locations make the cost of exploration and production prohibitively high. The Krishna-Godavari basin remains under-utilised. Recent discoveries of natural gas resources off the Eastern coast and in the Bay of Bengal however give some hope of increased production of natural gas in the future. Further, with the opening of coal mines for coal bed methane extraction India can unlock CBM reserves of about 4.6 trillion cubic metres. In spite of India being the third largest producer of coal, production rates lag far behind the fast growth in consumption hurting, most of all, the electricity generation sector.

Use of alternative sources: 16% of India’s installed power capacity is hydroelectric making it the world’s seventh largest producer of hydroelectric power in 2012. Nuclear energy forms a meagre 2% of India’s power generation capacity. Substantial use of biomass resources is prevalent in rural areas.

India’s energy policy

In the light of India’s resource paucity and fiscal burden an energy policy is indispensable. The three cornerstones of India’s energy policy as defined by the Integrated Energy Policy of India are energy access, energy security and climate change.

As a country that aspires to emerge as an economic power to reckon with, lack of access to electricity by a large swathe of its population is a hindrance to growth. The rural electrification project instituted through the policy is a step towards elimination of energy poverty. Meanwhile, large imports of energy resources, mainly oil, continue to deplete India’s foreign exchange reserves and also widen its current account deficit. This creates an emergency situation for the country leading to spiralling costs and high inflation, which necessitates support from the government in the form of subsidies, thereby increasing fiscal deficit. As regards to climate change, little has been done to alleviate emissions or adopt green technology. India is opposed to binding commitments to curb carbon emissions on the grounds that developed nations produced the most emissions at a time when India had not started on the path of industrialisation. However, India’s per capita emissions are only one-third of the world average.

Acquisition of foreign assets and creation of strategic partnerships becomes imperative in this scenario. Though investment in upstream operations is being actively pursued by state-run explorers, India’s efforts have been falling short in the light of Chinese competition. China’s strategic use of its diplomatic channels to win bids has enabled it to corner resources and secure its energy needs. Further, India’s geographic location in relation to gas-rich Russia also forms a barrier because of the Himalayan range.

India’s Procurement strategies vis-à-vis China’s

Differences between India’s and China’s strategies towards building energy security are easy to point out. While China has followed an aggressive and a single-minded approach towards locking up its energy supplies, India’s approach can be said to be passive and with lot of catching up to do. There’s a lack of strategic intent and clarity in goals in securing the country’s energy needs irrespective of the cost.

China and India are the second and sixth largest consumers of energy in the world respectively. India, already imports two-thirds of its oil and this may rise up to 90% of its oil needs and 40% of its gas needs by 2030. China has proven oil reserves of 18 billion barrels and known reserves of 53 trillion cubic feet(tcf) of natural gas in comparison to India’s 5.7 billion barrels and 47tcf respectively. It’s surprising that even though China is considerably better off yet its appetite is more ravenous than India’s.

India unfortunately has been much less successful than China in securing long-term contracts for oil and gas. Some of the recent examples are-

• Standstill of the Iran-Pakistan-India pipeline due to price renegotiations and risk of terrorist sabotage

• Bangladesh’s refusal to sell gas to India or to permit a pipeline from Myanmar to India on its territory.

The Myanmar case is an interesting one. For several years, India, in collaboration with Myanmar government, was involved in natural gas exploration on Shwe offshore, in the hope of securing a deal(pipeline) which would help India in meeting its energy needs. However, it didn’t work out when Myanmar decided to sell the gas to China. To add salt to injury, India’s ONGC is involved in building this pipeline!

• India lost out energy contracts in Kazakhstan despite bidding higher than China

The reasons for China’s success can be attributed to a strategic intent, synchronisation of foreign policy with their energy security targets and their willingness to pay premium prices. There are several instances where the Chinese have outbid their Indian counterparts.

Challenges and Opportunities

The energy sector is deeply interlinked to the geo-political environment globally. It’s important for India to secure its supplies through energy diplomacy given its high import dependence likely to rise in the near future. The challenges that India faces can be exemplified by some of the recent happenings that may have a long-term impact on India’s energy environment–

• The Arab spring: Disruptions in the production in the region have lead to significant price rise of hydrocarbons(short term and long term) and insecurity among the common public, given India’s heavy dependence on this region for its oil and gas supplies

• Golden era of gas: Post Fukushima incident of 2011, the world has seen a shift in focus from nuclear to other energy sources, especially gas. The shale gas revolution in the US and various other countries has also contributed to this shift. Rollbacks of nuclear plans in other countries, increased protests on the Kudankulam project are a roadblock in developing our nuclear energy. However, Japan’s announcement of reviewing its plans to abandon nuclear power has improved sentiments in the nuclear space.

So, where does India go from here?

The opportunities that India can explore towards building its energy sovereignty are:

-Alternative Resource Development: Wind and solar have immense potential and could become an important part of India’s energy mix. However, this cannot be achieved until the problems with storage and transmission wind and solar sources are dealt with. It is necessary to capture the energy exactly when wind is blowing, store it, use it when it’s needed. Another problem is the high cost and low efficiency of photovoltaic solar panels (15%). Cheaper variants come with even lower efficiency

-Technology partnerships: Energy diplomacy can help in forging technology partnerships with other countries. For e.g. the Japan-India partnership would help in strengthening its renewable energy front and moving towards energy efficiency and conservation technologies. Initiatives such as Waste to Energy, Green Corridor and smart grid development would be beneficial because of Japan’s competitive advantage through its Sunshine and Moonlight projects.

Conclusion

India has a long way to go achieve economic sovereignty in terms of its energy security. It needs to urgently formulate an energy doctrine which is aligned to its foreign policy in order to secure the present and future energy needs of the state. It needs to create more national energy options instead of relying on imports, through exploration of low-carbon hydrocarbons or by promoting alternative sources of energy. Technology partnerships should be actively pursued to accelerate efficient utilisation of domestic resources and also develop efficient processes and infrastructure to extract resources like shale and coal bed methane. Encouraging private investments in exploration and harness of new energy reserves will further breathe life into the tightly-controlled sector fuelling competition and growth.

Every little drop counts and India must get its act together in guaranteeing long term energy supplies in order to reach its goals of energy security.

This article has been authored by Subhangi Dutta & Antara Sarkar from IIFT